Definition and Examples of Insurance Policy Limits
Insurance policy limits tell you the maximum amount your insurance will pay for claims on each type of coverage you carry. If you incur additional expenses after your insurance pays up to the limit, you can be held personally responsible. In some cases, you can choose a policy’s limit. Other times, you may need to meet minimum requirements set by the government or another party to get the limit you want.
For example, most states require you to have a minimum amount of auto insurance coverage. Therefore, your insurance policy limits must be equal to or greater than those legal limits. The New York State Vehicle and Traffic Law, for instance, requires the following minimum policy limits:
- No-fault (personal injury protection): $50,000 per person.
- Liability insurance (bodily injury and property damage): $25,000 for bodily injury of one person, $50,000 for injuries resulting in the death of one person, $50,000 for bodily injury of two or more people in one accident, $100,000 for injuries resulting in the death of two or more people in any single accident, $10,000 for property damage liability per accident.
- Uninsured motorists: Same as the liability limits.
Insurance policy limits will vary by the type of insurance coverage and your state’s requirements, but all insurance policies will have some kind of limit.
How Insurance Policy Limits Work
Insurance policy limits are listed on the declarations page of your policy documents. Each type of coverage typically has its own limit. However, in some cases, a single limit can apply to multiple coverage types.
When you’re selecting policy limits, you’ll need to consider the minimum/maximum amounts of coverage available from your insurer as well as any other legal requirements. It can also be helpful to consider how much coverage you might need in a worst-case scenario, such as if your home and everything in it is destroyed by a fire. Once you select your policy limit, your insurer will calculate your premium and deductible options.
Types of Insurance Policy Limits
When reviewing an insurance policy, you may come across various types of policy limits, including:
- Per-occurrence limits: The maximum amount an insurer will pay for a single event/claim.
- Per-person limits: The maximum amount an insurer will pay for one person’s claims.
- Combined limits: A single limit that can be applied to several coverage types.
- Aggregate limits: The total amount that can be paid out for all claims during a period (often a year).
- Split limits: A combination of per-occurrence, per-person, and aggregate limits.
- Special limits: A maximum payout for certain items covered on an insurance policy, such as a valuable piece of artwork on a homeowners policy.
Be sure to read the fine print when it comes to policy limits, as they can vary from one coverage type to the next.
What Factors Should Determine Your Insurance Policy Limits?
How do you know how much insurance you need? It depends. Here are a few examples of common insurance types and how to choose your policy limits for each one.
Car Insurance Policy Limits
When deciding how much auto insurance coverage you need beyond the required minimum, consider what would happen if you caused an accident and were responsible for vehicle repairs and medical bills. Ensure your property damage liability limit would cover the typical cost of vehicles in your area.
When setting limits for bodily damage liability and medical payments coverage, consider the legal limits along with the value of your assets. If you injure someone, you could face an expensive lawsuit. While $100,000/$300,000 is often recommended, you may need a higher limit if you want to protect valuable assets.
You may also choose to purchase a personal umbrella policy to help cover excess costs.
Homeowners Insurance Policy Limits
When setting the policy limits for homeowners insurance, lenders will require you to meet a minimum amount of coverage if you have a mortgage. Beyond that, you’ll want to ensure you have adequate coverage to rebuild your home, replace your personal belongings, cover temporary living expenses, and pay for any injuries or damages that occur on your property.
Life Insurance Policy Limits
How about life insurance? In short, your policy limit should equal the financial obligations for the period you want to cover, minus your assets. Common financial obligations include:
- Final expenses, such as burial and funeral costs
- Estate taxes
- Funds for a beneficiary’s adjustment period, such as to support a grieving spouse while they take time off work
- Funds for the beneficiary’s bills and ongoing expenses
- Outstanding debts, such as mortgages, auto loans, and credit card debt
- Daycare costs
- Other expenses, such as college tuition for your children or care for elderly parents
Assets could include your current savings, pension, Social Security benefits, other insurance policies, real estate, and college funds. Add up the expenses, subtract your savings, and you’ll have an idea of the life insurance policy limit that might cover the gap.
If you want a shortcut, the general rule of thumb for buying life insurance is to set your death benefit at an amount equal to 10 times your annual income.
Insurance Policy Limits vs. Premiums vs. Deductibles
Three common terms when talking about insurance are policy limits, deductibles, and premiums. It’s crucial to note these interrelated key factors when reviewing and comparing insurance policies.
|The maximum amount an insurance company will pay for a specific coverage type.||The amount you pay per month or year for insurance coverage.||The amount you pay in the event of a claim before your insurance goes into effect.|
You can often adjust your deductible amount up or down. If you think the risk of a claim is low, you could raise your deductible to save on premium expenses. However, if you think a claim event is likely (such as when adding a new teen driver to your car insurance policy), you may want to lower your deductible, at least temporarily.
How to Set Insurance Policy Limits
Choosing the right limits for your needs is critical, as being underinsured could cause you to be sued and suffer a devastating financial loss. However, higher policy limits generally come with higher premiums, and you won’t get that money back if you don’t need to file a claim.
It’s a good idea to weigh your costs, risks, and benefits to find the right balance. If you need assistance or advice, reach out to your insurance agent. They can help you make sure you have the right policy limits for your specific situation.
- Insurance policy limits are the maximum amount an insurer will pay out on each type of coverage you carry.
- Various types of policy limits can appear on insurance policies, so it’s important to read your declarations page.
- You may be legally required to carry a minimum policy limit.
- The amount of coverage you need depends on a variety of factors unique to each type of coverage.
- Your insurance agent can help you find the right insurance policy limits for your situation.
New York State Department of Financial Services. "Minimum Auto Insurance Requirements Coverage." Accessed July 16, 2021.